Proof of expenditures with respect to royalties
One of the common cost factors when doing the accounting for Czech companies is the reimbursement within / outside the group related to the use of know-how, licenses, patents, trademarks or manufacturing processes on the basis of expired licensing agreements. The issue of royalties from the perspective of providers was discussed in the last issue of our newsletter. Today we focus on the perspective of the recipient.
In December of 2013, the Supreme Administrative Court (NSS) published a judgment which upheld the procedure of the Czech tax authority that licensing costs paid by a Czech subsidiary to the Dutch parent company, with respect to the use and reproduction of trademarks and logos, was not considered as costs necessary to generate, assure and maintain the income of the company.
The situation in this case was more interesting because the Dutch parent company invoiced license fees on the basis of a tax inspection from the Dutch tax administration. It showed that the Dutch parent company should receive payment for the sale of products amounting to 900 TEUR (the calculation of this amount was not specified in detail in the report) from the Eastern European subsidiaries (including the Czech entity) for a controlled period, whereas the relevant sub-section was invoiced to the Czech entity. For the following period, in accordance with Dutch tax legislation and the correct application of transfer pricing techniques, remuneration in the amount of 3% of net sales was agreed upon with the tax office.
In this case the taxpayer could not carry his burden of proof when he failed to demonstrate how he had used, and to what extent, the brand name and logo in the given period, whereas a general statement of the Czech entity that a trademark used on a product’s written documentation, business papers, advertising and promotional items was not considered as sufficient evidence. Also, the Dutch tax administration’s report or calculation of invoiced amounts cannot, in the opinion of the NSS, be considered as sufficient proof of an eligibility payment of royalties.
If you have costs related to royalties in your accounting, we recommend you evidence the following:
- the transaction really occurred and to what extent,
- the expenditure in question was incurred to generate, assure and maintain income
- the price is fixed at the level agreed upon between independent parties.
Otherwise, you run the risk that the Tax authority will not recognize selected costs.
Author: Michal Daňsa